Insider trading can be said to be when an employer or executive of a company, buys or sells shares based on confidential information about the company that is yet to be released to the public’ knowing fully well that this information can have a significant impact on the price of the shares. For instance, an employee in a company knowing of a big international collaborative project before it’s made public going to purchase multiple shares, knowing fully well that the share price would greatly increase after public reveal.
While most people may see insider trading as a way to gain profit, it is actually an unethical practice. One of the repercussions of insider trading is seen, first of all, in its impact on the shareholders of the company. It increases the costs to them and drives up the price of shares, causing shareholders to spend more money than they should. The insider traders also take in profits that should be meant for the group as a whole. This is a sole reason to avoid insider trading. Apart from the harm caused to shareholders, it also negatively impacts the stock market as a whole by widening the bid-ask price spread, making it more costly to trade in the market. Potential entrants into the market are more likely to be deterred by the price and the notion of the presence of insider trading activity.
To illustrate this further, we examined the case of Martha Stewart. Martha Stewart, the CEO of MSLO, was involved in insider trading. She had used confidential information provided to her by Peter Bacanovic, a friend and market with inside information, to sell out her shares in ImClone, a biopharmaceutical company also owned by another friend, Waksal. Doing this, she was able to avoid the impending losses that arose from a crash in stock prices after ImClone lost an FDA approval for a developing drug. Thus, Martha was able to rake in some profit. However, her activities came to the light of the authorities who probed and eventually prosecuted her and her accomplices. Her decision also turned out to be a selfish one when looked at from the angle of other shareholders in ImClone. While her decision may be seen as smart because she made short-term profit, her inability to consider the repercussion of public exposure was unwise. Had she been more prudent, she would have opted to not sell. After all, the value of her shares in the company was minimal compared to her net worth, a mere 0.03% of her total assets.
Personally speaking, in the light of the information I’ve gained from reading the case and the notes, I believe that insider trading is unethical. Prior to now, I had not grasped the full implications of it. Keeping in mind that one of the foundational pillars of ethics is that one must not wilfully cause harm to another human, it is clear that insider trading violates this principle by harming the shareholders and the company as a whole. It is a practice driven by selfish interest at the expense of others.
